quinta-feira, junho 14, 2012

Italy's Reform Stall

3italyEditorial do WSJ

If last weekend's bailout of Spain was supposed to reduce the risk of euro-contagion ahead of Sunday's elections in Greece, it hasn't had the desired effect. Yields on Spanish government debt have since hit a high of 6.78% on 10-year bonds. Who would have thought that adding as much as $125 billion in sovereign liabilities would make Madrid more of a credit risk?

Now markets are looking to Italy, where the economy is forecast to shrink by 1.9% this year, and where Mario Monti's reform agenda seems to be stalling. Yields on Italy's 10-year bonds hit 6.29% before falling back a bit Wednesday. Italy also paid 3.97% for 12-month bills Wednesday. A year ago, Italy was paying 4.8% and 2.2%, respectively.

This shouldn't come as a shock. Data released last week showed that value-added-tax revenue fell over the past 12 months, even though—sorry, make that because—Rome raised the rate to 21% last year. The VAT rate is due to rise to 23% in October. A new property tax on primary residences kicks in next week.

Prime Minister Monti says he wants to prevent the VAT hike, and he told the Italian Parliament on Wednesday that "growth is our main worry." That's nice to hear, but the question is whether Mr. Monti has any idea what to do about it.

Not raising VAT would be a good start, but it hardly qualifies as a growth platform. Italians continue to pay a top marginal income-tax rate of 43% that kicks in at €75,000 and rises to 46% for those making more than €300,000. That might help explain why tax evasion is endemic in Italy, and why an astonishing 27.4% of Italian GDP is off the books, according to a recent estimate by an Italian Central Bank official. Some of that is criminal activity, but mostly it's otherwise honest businesses trying to avoid the tax man. Yet Mr. Monti never speaks about lowering these rates.Then there's Italy's notorious Article 18, which imposes severe labor regulations on any company with more than 15 employees. We applauded Mr. Monti when he first sought to change the law. (He demurred at our praise.) Since then, however, he's only retreated in the face of parliamentary opposition.

Now his reform, which would still give workers the right to appeal their dismissals to a judge, may not even have the votes to pass. One leading Italian industrialist recently complained to us that once you factor in "social costs," as he put it, Italians are as expensive to employ as Germans. They are merely a lot less productive. That's Article 18 at work, and so much for reform.

The Prime Minister is hanging his hopes on the next EU summit at the end of the month. Yet Italy's problems will not be solved by any hoped-for Keynesian blowout, even if the Germans could afford—and would agree—to finance that. Rome has been spending more than it collects in taxes for decades, which is how it got its debt to 120% of GDP in the first place.

The solutions to Italy's problems, tax cuts and labor-market reforms above all, aren't any mystery. Whether there's a politician in Italy who can summon the support to implement them is another question.

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